Air NZ charts careful course

By CHRIS DANIELS aviation writer

Air New Zealand is earning good profits from lower revenue, but is sticking to its conservative tack of talking down its prospects and warning of tough competition.

Company chairman John Palmer described the $105.4 million half year profit - up 12.2 per cent from the same period last year - as "a very commendable result in a challenging environment".

As if to underline the airline's financial stability, Palmer said there was no need for any capital raising, by way of a rights issue, before the end of June.

No dividend was announced.

Palmer said the company was looking at options in transforming its long-haul business.

All these options required continued access to debt and equity, so the directors had decided that "given continued capital demands, plus unresolved alliance issues, no interim dividend would be declared.

The Government was going to carry its promise to put $150 million into any rights issue forward into the next Budget round.

Palmer said 68 per cent of the forecast $220 million annual profit had been achieved, but the airline would not be raising its full-year prediction.

Chief executive Ralph Norris said the airline was expecting increased competition on the Tasman and a continuation of the fare war that had been going since the end of November."

Palmer gave a similar caution.

"It's important for the market to understand that the competitive landscape we see for our business in the second half of this year is significantly different from the second half of last year."

Freedom Air, often used to fend off new competitors, had its role clarified by Norris.

He said Freedom had recently been "given the mandate" to extend its range to selected destinations within a five hour range.

Freedom recently started services to Fiji, days after travel agent chain Flight Centre announced it would start charter flights from New Zealand to Nadi.

Air NZ is continuing its joint appeal with Qantas against NZ and Australian competition regulators' refusal to let the airlines set up an anti-competitive alliance.

Norris said regardless of the current appeals, some sort of alliance between the two airlines would eventually happen.

Qantas chief Greg Dixon said this week other options would be pursued.

"We've had trouble convincing just about everybody [of the merits of a merger], so us and Air New Zealand will probably sit down and see if there are other ways to work together."

One pleasing aspect of the Air NZ half year result was a net increase in cash holdings of $129 million, to $894 million at December 31.

Gearing, a measure of the company's indebtedness which it is trying to get down to between 45 and 55 per cent, fell again last year and is now 59.3 per cent.

This is its lowest level in seven years.

The high value of the dollar had a mixed effect on the airline.

Nearly half its tickets are sold overseas, meaning a drop in revenue when the dollar is high.

It also cuts into the money earned in foreign currencies for its lucrative engineering business.

About 45 per cent of the airline's total costs are counted in US dollars, so a high New Zealand dollar helps in many areas.

The net benefit of the higher currency was $32 million.

Air NZ's "express class" service of lower fares and more flights helped boost domestic business.

Norris said domestic traffic had increased 16 per cent in the past six months, making a 40 per cent compound increase since Express was introduced.

Tasman Express, started last year, had lifted traffic by 11 per cent, and online bookings had jumped from 3 per cent to 35 per cent in February.